Germany After the Hartz Reforms

Can the SPD Protect German Labor?

The odds were always stacked against Martin Schulz, the Social Democratic Party (SPD) challenger to German Chancellor Angela Merkel in the forthcoming election. Europe’s largest economy is doing so well that voters are simply reluctant to change leaders. After all, in 2005, when Merkel and her Christian Democrats (CDU) took over, German unemployment stood at 11 percent; economic growth had been practically zero for four years running; the fiscal deficit remained stubbornly above 3 percent, the limit set by Europe's fiscal rules; and public debt was rising. Today, after 12 years—ones that brought financial, euro, and refugee crises—Germany is at full employment, the economy and wages are growing steadily if not impressively, and the German government is running a budget surplus, thus causing public debt to fall fast.

Merkel has never claimed credit for that economic recovery. She did something craftier: she gave credit to her SPD predecessor, Gerhard Schröder, and his package of labor market and benefits reforms that was entitled “Agenda 2010” but is widely known as the “Hartz Reforms.” She knew, of course, that these reforms implemented in the early and mid-2000s remained highly unpopular among left-leaning voters and SPD members. By supporting the narrative that it was these reforms that turned the sick man of Europe into an economic powerhouse, Merkel put the SPD in a terrible bind: it could agree with her and claim credit for the recovery by sticking with the unpopular reforms, or it could promise to roll back the legislation and get blamed for putting Germany's economy at risk.

Worst of all for the SPD, Merkel’s narrative was not even true. The Hartz Reforms did tackle weaknesses in Germany’s labor markets and benefits system. But they were not the main reason for the country’s subsequent economic recovery. In fact, their overall impact was modest.

Let’s start with what the reforms were really about. First, they changed the way the German labor market operates. For example, programs for unemployment aid